Death By Hourly Wage

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I write very quickly. Especially when it comes to response-driven marketing copy. It’s taken years of study, practice and a significant investment over time.

So, if I can now create an asset that generates six or seven figures in revenue while a client sleeps, what do they care how long it took me to write it? That’s not what they’re paying for. They’re paying for the impact my words will have on them, their business, their life, their clients, their world. They’re also paying not to be first.

A lot of people ask me about how to price their services, especially if they’re operating or launching a business where there’s an established hourly-work course of dealing. So, let’s talk about pricing by the hour…

Hourly Billing Burns the Social Dynamic…

The psychology of the relationship between you and your client will be radically different when it’s based on hourly pricing than it will be when it’s based on outcome/project/continuity pricing. When people pay you per hour, clients tend most often to obsess over what you’re doing every hour, instead of what net-effect you’re having on them. That often leads to unreasonable expectations and the desire to micro-manage outsourced relationships. Bad sitch!

This isn’t always true, and it also depends on a number of factors, like whether you are working more as an employee under their direct supervision, on a contract basis, or whether you’re working on your own time, in your own space and the metric is more about what you deliver. That dynamic is also influenced greatly by the size and maturity of the business that hires you. A large organization will have very different expectations than a smaller one, the smaller ones often being the most strapped for cash and wanting the greatest amount “proof” that every hour is giving them something.

When you base your work on an agreed-upon outcome, the social dynamic between you and your client become much looser. There’s no need to justify what you’re doing every hour. Just make the promised outcome happen in the window you agreed to and everyone’s happy.

Hourly Doesn’t Scale Well…

It’s more complex to scale both your own efforts and your organization, when you work on an hourly basis. On an individual level, you can only work so many hours before you implode. So, the only way to scale your own hourly work is to raise your rates. If you can earn what you need, both now and into the foreseeable future, with your hourly fee, that may suffice. But, if not, you’ll have to raise your fees and often there’s a psychological cap for certain services. And, the even bigger limiting factor is the internal struggle so many people feel about raising rates.

If you have designs on growing a larger entity based on hourly billing, you end up doing a complex dance between finding and delighting top talent and having the demand for hours to bill. You’ll also spend a lot more time tracking and reporting, so the administrative burden ramps significantly as well and clients will want detailed proof of work for every hour billed if the work is done off-premises.

But, what about newbies?

Understand this – pricing in the early days of a relationship is as much about removing barriers as it is delivering value and crafting an offer that is irresistible. People and businesses who hire you are, in the end, always looking for a certain outcome. They may not know exactly what it is or why they need it in the beginning. And that’s when it’s your job to help them define the outcome and associate a value.

Yes, that’s sales. But sales isn’t a bad word, it’s an amazing word when the process is about helping, adding clarity and defining a relationship that allows you both to get what you need.

Along the way to defining these things and focusing on value, though, you’ll need to overcome resistance. And, as a newbie, even if you’re really good at what you do, people will hesitate because you’re not yet a proven entity. That does not mean, however, that you need to default to hourly pricing as the only way to ease the hesitation. A few other highly effective options include:

Creating an outcome-based step-ladder pricing schema – Give people and business prospects a series of options that allow them to “test the waters” with your service. Start with a very low-priced audit service & report. Then offer a standardized compact strategic consult. Add in a core outcome-based program/continuity-relationship with pre-defined metrics and renewal conversations. The idea is to allow prospective clients to get incrementally comfortable with you AND train them to expect to work with you on an outcome basis from day one.

Reverse the risk – Rather than letting someone try you out free for a few hours, set the expectation that you are valuable, but then offer to reverse the risk. Tell them your fee, then add that at the end of the X service, if they are not 100% satisfied, they don’t have to pay you. Yes, it’s a risk, but especially in the beginning, it profoundly changes the resistance to beginning a relationship. As you become more established, this becomes less important.

Leverage social media & speaking to establish authority – The more you speak at organizations, run your own local education seminars and webinars for clients and prospects, the more you establish yourself as an expert in the space. Add this to serious high-value blogging and you can go from zero to 60 in far less time that ever before.

Focus on Commitment, Programs and Outcomes…

No doubt, in certain industries where there is a longstanding course of dealing around a specific pricing schema, it may be harder to move beyond that. But, that doesn’t mean it’s not possible.

When I entered the personal training world as a complete unknown, I immediately decided to do something radically different. I had no reputation, no following and, honestly, no real business being there. Yet I charged top-of-the-market rates. AND, you could only try me out once before signing up for an outcome-driven program.

I also created the first-ever “replenishment account” approach to training programs, which operated much like EZ-PASS for your car does. Clients would commit to X visits a week for a Y week program, and when their accounts hit a certain minimum balance, they were automatically replenished, eliminating the recurring sales burden. Included in those programs were regular assessments to ensure progress was being made toward an agreed upon outcome.

Eighteen months after opening, we generated more personal-service revenue per month than the average full-size health club generated in a year, selling only “commitment programs” around agreed upon goals. So, it IS entirely possible to come out of the gates with non-hourly pricing in an industry based on hourly pricing, you just really need to figure out an intelligent combination of policies that shift risk and focus on commitment and outcomes.

Similarly, if you visit my Borrow My Brain page, I charge $1,000 to spend up to an hour brainstorming with you. But I make it clear you’re not paying for the hour you’re paying for the value of the ideas. If I give you 5 ideas, 15 minutes into the call, each capable of generating $100,000 over the next 12 months, then the $1,000 investment is an insane bargain. You’re not paying for the time on the call, you’re paying for the outcome and years it’s taken me to be able to give it to you in only 15 minutes, instead of 15 hours.

The wrap up –

A man walks into a dentist’s office. The dentist finds two cavities and has time to fill one that day and one later that week. After the first tooth is filled, the man goes to pay and is stunned by the bill. He asks the dentist, “how dare you charge me so much, it only took you 20 minutes?!” To which, the dentist replies, “no worries, I can make the second tooth take an hour if that makes you feel better.”

Simple fact – as you get better at what you do, you’ll be able to accomplish far more at a higher level in less time. Because of this, over time, hourly billing almost always leaves someone feeling screwed. If not you, then them.

If at all possible, just say no to hourly billing.

So, what do YOU think?

Share your thoughts in the comments below…

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Michele, I have seen coaching letters of agreement that cite the coach’s commitment as “providing the very best coaching I am able, based on my xxx thousands of hours of training and client work” and the results as “commensurate with the client’s efforts and commitment to the goals as agreed at the outset of the engagement.” It’s also useful to have client references who can cite value derived as greatly exceeding time spent.

Yes it works better, yet it is not norm so the sell for it is totally different. So often I have people ask can I just hire you for a couple hours a month?

How do you advise folks who consult or coach to create a solution when they are meeting with clients once a week etc… so that the client does not absorb more than you created for their time with you? You can say that same ole’ you get unlimited access to me via email an dI have seen folks really abuse that too. Yes, I get it is about expectations – yet the average mind always falls back to them calculating in their heads the hours they will get in deal.

Now you have given me an idea for Don Cooper on #BBSradio to address how to sell solution priced services and deal with hourly constraints.

I have told clients I sell by campaign or service not hourly, yet they are always equating things in their heads from a hourly perspective. Looking forward to seeing general mindset shifting to eliminate that barrier.

Michele & Lilia~You raise excellent pts about the coaching field. Quick suggestions/inquiries/reflections: As the coach and consultant, you’re the ‘expert’ who has the exp. and perspective to assess how approx how long an expected outcome might take. So, once you and the client co-define the expected outcomes, you give input on how realistic the expected time frame is (3 mos, 6 mos, 9 mos) given the work they must do in the interim. That’s in part why they come to you. For ones who can afford it, you can create custom outcome-based packages that define what is expected of both parties. You sketch a map that’s flexible, not rigid. The map becomes a way for both of you to check in with progress being made. In such cases, people are not paying for the 30-, 60-, 90-minute meetings. They’re paying for the strategy, long-term vision, mental bandwidth, and idea-radar that you provide in between meetings.

Another story, maybe apocryphal:
In Paris, a woman spots Picasso and asks him to sketch her portrait. In 20 minutes, he whips out a Picasso-signed sketch. “How much do I owe you?” “$20,000,” the artist says. “My heavens! I’m paying $20,000 for 20 minutes of your time.” “No, Madame. You’re paying $20,000 for a lifetime.”

Like the idea of the article. My own quandary is that in the coaching world, the paradigm is to charge by the hour. In thinking about this, how do you develop a new one that gets away from the hourly chain and focuses on the results?

@Lee – I think it goes back to what he said about packaging services or products under a project fee, versus sticking to an hourly basis. I understand your position, since I came from the same place – it’s what they teach you in coaching school. But think about how you can package your products or services on more of a “commitment”-basis like Jonathan said. Or take a step further and think about what kinds of passive products/services you can offer that don’t require billable hours from you each time someone purchases – evaluations, assessments, reports, e-books, kits, etc. Cheers!

As a consumer, I view things the same way. If I get an hour of coaching, I’d rather learn one or two concepts really well, things that will stick with me and are instantly actionable, rather than an hour filled with too many points that are great yet overly technical or too numerous that I can’t remember even a couple a few minutes later. I’m not even concerned if the session starts a few minutes late or ends a few minutes early. Sometimes it’s just one idea, or 5 to 15 minutes of something perfectly digestable that makes the whole session worthwhile.

Jonathan~Another smart, timely article. The hourly rate is a trap on both ends – for your clients and for your team members. Your pricing schemata also should reflect the quality of the day and of relationships you and your clients seek.

Quality of the engagement: I remember when in India a Western-educated Indian man told me how one morning he tried to buy up a whole pile of devotional garlands from a woman. She balked. It would ruin her day b/c the quality of her day is based not on how much she earned but on the interactions she had with the people she sold garlands to throughout the day.

We also forget this other end: how to hire people & sub-contractors on an outcome basis.

The gentleman who “does our books is not a bookkeeper but a financial strategist. We’ve shifted him from an hourly rate to a “project rate.” It’s in writing how his work aligns with the company values and goals – and what his accountability is. Now I don’t have to obsess about “how long” it takes him to complete tasks, etc.

I work this way with our designer and programmer and am trying to figure out how to work this way with our virtual admin asst.

I wonder what insights you and others have on this end of the equation.

Jeffrey – as far as figuring out a way to pay your VA that way – you might check out these videos by Tina Forsyth & Lena West. They’re from the other perspective (how a VA or online business manager can move beyond being paid hourly) but there are a couple of good ideas that you might find interesting/useful.

I do online business management and the way I have it set up is that I charge an hourly fee until we have a good working relationship, and then switch to a base payment + an incentive payment (an agreed-upon percentage of revenue) when we’re both comfortable with it. If I’m doing my job right, they should be making more money because of me, and that also gives me extra incentive to put 110% of my effort in and go the extra step.

Hope that helps some and kudos to you for being willing to shift beyond paying an hourly wage!

This is a great article, and you do a great job really breaking down the numbers and the importance of value versus hours spent on a project. It’s all about the quality of the product or service they receive in the end – that’s what sells in the first place, the tangible benefit. I see a lot of people in consulting and similar fields limiting their earning potential by only offering what they can provide on an hourly “hands-on” experience, versus looking at pricing based on value so they can service a bigger client base, and bring in more revenue to their business at the same time. Cheers!

Two great quotes from this that I intend, with full attribution, to use – “I don’t charge by the hour, I charge by the awesome” and “They’re also paying not to be first.” If a professional invests ten thousand hours to be masterful at whatever they do, then great value can ensue in a very short period of time and the reward is best aligned with that value. Excellent post – I have sent it to many already!

The sticking point is establishing agreed-upon outcomes. In computer systems development work, fully defining the requirements/expectations is frequently 70% of the effort, and iterative, changing requirements are par for the course. Especially if an effort extends more than two months. Clients feel nickle & dimed if each requirement change results in a change to a “fixed-price” agreement, so hourly agreements bounded by do-not-exceed caps seem to be more accepted, even though the net result is still a revision to the project estimated costs & delivery timing.

It seems to me the Outcomes is the answer. Work for Outcomes not for hours. As I watch successful people grow in their own business everyone of them gravitates more and more towards outcomes over hours.

Like you said in your article, if you can work for an hour and produce results why should you have to work for 10 hours?

Love this concept… and something I’m going to be exploring more as my own business grows.

1) Do you really believe money = quality? Not everyone who does a job in record time and charges up the wazoo is qualified or gives producing ideas.

2) If you cannot come up with ideas for a client, do you still charge them $1000 for your time? Or, what if they follow your ideas to the letter and still do not produce the expected results…do they get back their $1000?

3) If the surgery ultimately does not produce the promised outcome…will you ask for your money back?

Please do not read this as a criticism, these are just questions that came to me as I read this post. It seems to me whether hourly or set rate, you take a risk. Nothing is a 100% guarantee; some always feel the pinch of an overly costly endeavor even when the outcome is postive.

As a music therapist, I can see what you propose working in certain settings. I’m not sure it will work for all work in all settings. Yet, I love the concept of people paying for the awesomeness I share.

For the life of me, I can’t keep track of my hours; I work when I feel like working, or when stuff needs to get done. Even though I never charge by the hour, I had a client who wanted an hourly breakdown of what was basically a retainer, so I was forced to guesstimate. And guess what – just like you said – it didn’t work out. He wanted to micromanage and I resented the additional admin, and ended up feeling like I wasn’t being paid enough. Never again. I will charge by the awesome from now on!

I do not coach or write, I do home organization. I started at 50/hr. I can scale down, or up depending on the client’s income, but I also give rebates for things I sell, and referrals, and time over 5 hours for one session. I work very hard and often in non conditioned premises, thus, hot, cold, moldy etc. My line is: I cost less than merry maids. When dealing with the non-corporate, you have to give them a price.
I never know how many hours we are going to work, and so cannot price myself out another way. There is a lot of psychology done during this service, a lot of hand holding, and a lot of bargaining about what they must let go and what they might keep. So far, so good, but I’m willing to listen if you can tell me some other way.
If I were to start by giving them a thousand or more price point they would definitely refuse because it sounds like too much. If I charge by the hour, they forget because we are hard at work until we have finished to their satisfaction, and then I can adjust the bill so that they see that not only have I helped them fix up their homes, I am giving them a break on the price.

Based on your article and the comments, it’s clear to me that moving from charging by the hour to charging for outcome is a process. While we can experiment with different options, we won’t be able to get to the “awesome” end until we convince our own subconscious of the deep value we bring to our clients.

At nGen Worksa, we switched away from value based billing to hour-based about a year ago and haven’t looked back. We’re bigger, stronger, have better clients, and do more interesting work. It’s all in how you manage it.

Here’s my question. When do you consider yourself an expert? Do you follow the 10,000 hours rule? How about if you are just starting out with a freelance business and are offering a variety of services.

For instance as a web copywriter you can write a press release very quickly, but writing sales copy for a web page can take much longer. I like the idea of the outcome based step ladder approach but am not clear on how to guarantee an outcome.

Jonathan, juicy stuff as usual. In my copywriting work, I’ve often found that quoting an hourly figure, even when there’s a built-in ballpark figure that spells out projected total hours, makes clients paranoid or antsy. I’m trying to move from having long quoted an hourly to always discussing billing on a project basis first—one that defines the desired results.

It is always best to specify in advance how many revision rounds editorial projects can go through before there are additional charges, and to prevent project-creep, where writing five pages of website content turns into “And can you throw in 10 taglines and some landing-page headlines too?” when you’re almost finished.

Thanks for some good ideas on redefining value, and what services can be offered to clients in a way that’s helpful for everyone.

3. It sets a bar. If you ask Clay Collins, Eben Pagan, etc. how much their consulting costs, they’ll rifle off a what seems quite a significant number to most people “per hour”. That doesn’t mean that’s how they package and sell themselves, but it is an instant bar-setter, conversation-wise.

So… yeah, I dunno – just offering a fresh perspective, and when it all comes down to it, well-packaged, non-hourly pricing is by far recommended.

I get what you’re saying… But what happens when you are working with a super narrowminded mega corporation that requires you to provide a rate card before they’ll even sign an agreement to do business with you?

Great points! I’m a very new freelancer (writer), and this question is on my mind a lot. I’ve found that, as I’m starting out, clients who offer an hourly rate stand to be higher-paying but less rewarding gigs. Those who pay for results, on a per-article basis for example, are more focused on the quality of the outcome, and the relationship is much more comfortable, fulfilling, and natural. As I grow with these results-focused clients, I can slowly start earning more money based on greater and better output, rather than on more time spent. Thanks for putting that into perspective!

Jonathan, so many great observations. Some thoughts this brought forth is that when we pay someone by the hour, we trivialize their value, degrade their worth, and show a lack of appreciation for the outcomes they deliver.

What I think is that your writing is awesome. Pure lovely content and this hourly rate thing is killing American as most people think of getting hourly rate increased and not getting to start something worthwhile.

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